Just the name, Fiscal Cliff, invokes fear. Great marketing on the part of somebody with a motive to get the deal done! In David Letterman’s monologue last night, he included a joke or two about the Fiscal Cliff and the absence of a clear definition so we wouldn’t have to worry about it. What is it, or what was it?
Very generally, on December 31st just about everyone’s taxes to the Federal Government was to increase, and the Federal spending was to be reduced by 10%. On its face, that does not sound like bad financial management given the debt our nation is in (about $140,000 per household!), and climbing by the minute. Currently the Federal spending represents about 24% or the GDP, and historically it has only been in the high teens. But the short-term thinkers decided that would be too much austerity at one time for our fragile economy, so out came the Band-Aids, which is now known officially as the American Taxpayer Relief Act of 2012. The ATRA was passed by the Senate and House on January 1st and signed into law by the President. It contains a lot of tax provisions that basically keeps things the same as in recent prior years for 99% of folks, and temporarily postpones the Federal spending cuts for two months. What was left out of the bill, and not extended are provisions that will affect 100% of taxpayers.
There are many tax provisions in this bill, but the biggest tax increase will be experienced by those who annual income is over $400,000. Most of the tax provisions that affect 99% of folks are what the bill refers to as “extenders”. Extenders merely allow the previous tax rates, deductions, and credits to continue to 2012 and 2013, and so on. In fact, some of these extender provisions were made permanent. Without the ATRA individual income tax rates would have risen for all income groups, the low dividend and capital gains rates would have increased for all, and Federal estate tax would have increased significantly.